EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The LED Lighting Tax Aspects of Restaurants

Restaurants throughout the country are moving quickly to install energy
efficient LED lighting. Despite the typical high upfront costs, LED lighting
offers exciting lighting design capabilities, energy savings, maintenance
savings, utility rebates and substantial EPAct tax savings that can make LED
lighting the best overall choice. Before the widespread introduction of LEDs,
it was often difficult to execute an energy efficient design that would enable
an entire restaurant to qualify for an EPAct tax deduction.

The EPAct 179D Tax Opportunity

Pursuant to Internal Revenue Code (Code) Sec. 179D, as enacted by the Energy
Policy Act (EPAct),1 building owners or tenants making qualifying
energy-reducing investments can obtain immediate tax deductions of up to $1.80
per square foot.

If the building project does not qualify for the maximum
$1.80-per-square-foot immediate tax deduction, there are tax deductions of up
to 60 cents per square foot for each of the three major building subsystems:
lighting, HVAC (heating, ventilating, and air conditioning) and the building
envelope. The building envelope is every item on the building's exterior
perimeter including the roof, walls, insulation, doors, windows and
foundation.2

Lighting Tax Planning

Design

To make the customer comfortable with familiar surroundings, national
restaurants often want the same look and feel at each property. Some
restaurants have interior ceiling designs with surfaces and hanging or mounted
objects that limit lighting layouts to fixed spaces. The LED advantage is that
LED lighting is very powerful light that can be focused exactly where the
lighting need is. In fact, LED lighting greatly expands the interior
designer’s alternatives. Restaurants typically utilize numerous lighting
fixtures and the maintenance costs for replacing previous generations of
shorter life lighting projects could be quite expensive particularly with high
ceilings and other lighting in hard to reach locations.

Space Combinations

Many popular restaurants have large open design configurations that
sometimes combine spaces devoted to a bar/lounge, dining and the kitchen. Here
the EPAct tax deduction opportunity is to use the lower wattage spaces to
balance out higher wattage needs so that the overall lighting wattage is energy
efficient and effectuate an EPAct qualifying design. Although good building
design should always trump tax, by working together, the tax adviser and the
designer can often accomplish their mutual goals.

Utilizing Daylighting Combinations

Many restaurants have large window to wall ratios in the customer serving
areas. Some restaurants utilize skylights. Daylighting systems save lighting
related electricity by dimming or turning off lighting when natural lighting is
available through windows and skylights. Here the tax planning opportunity is
to use daylighting systems including shading and sensors to optimize the use of
the large 40% tax wattage power allowance for day lighting.3 For
example, for tax purposes a 100 watt fixture will be considered to be a 60 watt
fixture if it is within the day lighting sensor controlled area, meaning day
light reaches the fixture. Note that to receive the 40% day lighting tax power
allowance the building must be modeled in IRS approved building simulation
software.

LED's and HVAC (use the V)

HVAC is by far the largest energy user in restaurants. When building new
facilities and upgrading existing facilities restaurant owners should carefully
consider installing the most energy efficient HVAC equipment and HVAC controls
systems available in the market. One important tax technique is to optimize the
use of energy efficient Ventilation, which is the V in HVAC. Good ventilation
is critical in restaurants due to kitchen fumes and long periods when customers
are stationary. Energy efficient ventilation optimizes the energy savings
related to changing fresh outside air with the older previously circulated air.
The use of Energy Recovery Ventilation (ERV) can capture the energy being
ventilated and exchange it with the fresh air being pulled in from the outside.
In addition, since most restaurants are less than 75,000 square feet,
installing a Variable-Air-Volume (VAV) packaged unit will generally qualify for
an EPAct tax deduction.

LEED Restaurant Tax Planning

Virtually all large expanding national restaurant chains have or are
considering a LEED certification qualifying restaurant design. LEED stands for
Leadership in Energy and Environmental Design and is the renowned standard for
sustainable buildings in the United States.4 LEED restaurants may be
required in some shopping centers and may receive expedited zoning and
permitting approval while typically earning higher utility rebates. For large
chains a LEED restaurant is a powerful tax planning tool since it already has
building energy simulation model that can be converted into the EPAct tax model
necessary for achieving the HVAC and building envelope EPAct tax deductions. It
is particularly important for large chains with new energy efficient prototypes
to perform an energy simulation model regardless of LEED goals. The model will
make it clear whether the facility already qualifies for EPAct tax savings or
is on the cusp of qualifying for EPAct tax savings.

McDonalds, Chipotle, and Starbucks are among the growing number of
restaurant chains incorporating LEED standards into their building design.
According to an Earth and Industry Article, Starbucks has even replaced all
incandescent and halogen bulbs with LEDs in 8,000 stores and has made mandatory
that all newly built Starbucks will obtain LEED certification.5
Independent restaurants are also taking advantage of LED lighting. For example,
Red Stag, a Minnesota dining hall, achieved LEED certification through
techniques including converting almost 100% of their lighting to LEDs. Since so
much of a restaurant’s operating costs are directed towards energy use,
much more so than the average small business, it is becoming a more common
investment for a restaurant to achieve LEED certification points through energy
reduction measures.

Putting the Prix Fixe Program Together

The most energy efficient LED lighting based restaurant chain that will
qualify for the highest level of tax deduction will be the one that puts it all
together like a good Prix Fixe meal. Putting it all together means installing
LED lighting, day lighting, and high efficiency HVAC with an emphasis on V. The
chain that puts these together will achieve large energy savings, large rebates
and large EPAct tax deductions.